Currency Competition and Consumer-Driven Unification
Author(s)
White, Lawrence H.
Abstract
Economists normally take it for granted that the ultimate goal of economic policy is to satisfy the preferences of market participants, and normally recognize that consumers benefit more from competition than from monopoly. Yet some object to allowing competition among monetary standards within a single country. When consumers do not have a single currency imposed on them, but are allowed to choose freely which currency to use, competition can become a route to unification through spontaneous convergence on a preferred standard. For people whose domestic central bank issues low-quality currency, open competition allows them to unify with – by voluntarily adopting – a stronger currency issued by someone else. This kind of currency unification from the bottom up is known as “unofficial dollarization” where the stronger currency adopted is the US dollar. The standard policy-instrument objections to dollarization focus on the domestic government’s losing three things: 1. a useful tool for macroeconomic stabilization policy, 2. “sovereignty” or national pride, and 3. seigniorage.
